Bio-Rad Laboratories, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Bio-Rad sells life science research and clinical diagnostics products worldwide through its Life Science and Clinical Diagnostics segments. Approximately 67% of first-half sales were international.
Financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $525.3 million | $510.4 million | $1,025.0 million | $996.7 million |
| Gross profit / margin | $300.1 million / 57.1% | $287.9 million / 56.4% | $571.5 million / 55.8% | $566.5 million / 56.8% |
| Operating income | $51.5 million | $73.3 million | $85.1 million | $127.7 million |
| Net income attributable to Bio-Rad | $34.7 million | $48.3 million | $54.2 million | $79.3 million |
| Diluted EPS | $1.20 | $1.69 | $1.88 | $2.78 |
| Operating cash flow | Not separately stated | Not separately stated | $39.2 million | $108.9 million |
Q2 sales increased 2.9% year over year (about 4.0% excluding currency); first-half sales rose 2.8% (about 3.8% excluding currency). Q2 SG&A was $195.3 million, or 37.2% of sales, versus $162.3 million, or 31.8%, a major factor in lower operating income. First-half SG&A was $381.2 million, or 37.2% of sales, versus $333.5 million, or 33.5%. First-half R&D was $105.2 million, essentially unchanged year over year.
Segments and material changes
- Life Science: Q2 sales were $170.4 million, up 4.9% (6.2% currency neutral); first-half sales were $326.6 million, up 3.0% (4.4% currency neutral). The segment recorded a Q2 loss of $7.6 million and first-half loss of $20.4 million, versus profits of $5.4 million and $1.5 million, respectively, a year earlier. Management cited acquisition-related inventory step-up and intangible amortization, including $4.2 million in the first half.
- Clinical Diagnostics: Q2 sales were $351.5 million, up 2.2% (3.2% currency neutral); first-half sales were $691.4 million, up 3.0% (3.8% currency neutral). Segment profit declined to $48.5 million in Q2 from $55.4 million, and to $84.6 million in the first half from $101.2 million. First-half pressures included low-margin tenders, product mix, obsolescence, license and warranty costs, and the new U.S. medical-device excise tax.
- Consolidated gross margin improved in Q2 but declined for the first half. Q2 Clinical Diagnostics margin benefited from product mix; Life Science remained affected by acquisition-related charges. The U.S. medical-device excise tax reduced margins in 2013.
- First-half operating cash flow fell to $39.2 million from $108.9 million. The filing cites higher supplier and employee payments, including bonuses and headcount, slower domestic collections during the ERP transition, and prior-year benefits from a Spanish receivables collection and royalty-audit settlement. Inventory increased $37.1 million in the first half.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $367.0 million and short-term investments were $467.4 million, totaling $834.4 million; approximately 23% was held by foreign subsidiaries.
- Total debt was approximately $734.5 million, including $297.3 million of 8.0% subordinated notes due 2016 and $423.1 million of 4.875% senior notes due 2020. The company had no borrowings under its $200 million revolving credit agreement and reported covenant compliance. The agreement expires June 2014.
- First-half capital expenditures were $58.6 million, down from $75.7 million. Investing cash outflow was $143.1 million, including $79.4 million for acquisitions and long-term investments. Cash declined by $96.4 million during the half.
- Management expects capital expenditures to increase as implementation of its global ERP platform and e-commerce expansion continue. The ERP implementation could cost up to $200 million and take four or more years.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management describes economic conditions and customer funding as uncertain, and notes that government spending restraint, reimbursement constraints and sovereign payment delays could affect demand and collections.
- DOJ and SEC investigations into possible FCPA violations in certain overseas operations remained ongoing. The company could not estimate the outcome; sanctions or remedial measures could materially affect business or financial condition. A related shareholder derivative matter was stipulated dismissed without prejudice, with the limitations period tolled pending the investigations.
- A material weakness in internal control over financial reporting remained at June 30. The underlying deficiencies involve accounting close, revenue recognition, reagent rentals and expenditure controls; remediation was underway but incomplete. The company also identified prior-period comprehensive-income presentation errors, deemed immaterial, that did not change total other comprehensive income.
- Other notable items include the January acquisition of AbD Serotec for $62.2 million net of cash received, and a first-half tax benefit from reinstatement of the 2012 U.S. federal research credit, contributing to a 23% effective tax rate versus 29% in the prior-year half. IRS examinations for 2009 and 2010 and other tax audits are ongoing; approximately $2.4 million of unrecognized tax benefits could decrease within 12 months.
- Additional risks include substantial leverage, foreign-exchange exposure, competition and regulation, and exposure to sovereign customers. Net receivables in Spain, Italy, Greece and Portugal were $68.1 million at quarter-end.
Important facts for investors to verify
- Whether sales growth and segment profitability improve, particularly in Life Science and Western Europe.
- Whether operating cash generation recovers and collections normalize following the ERP transition.
- Actual ERP implementation costs, schedule and resulting operating expenses and capital expenditures.
- Progress in remediating the material weakness and any developments in the DOJ/SEC FCPA investigations.
- Debt maturities, covenant headroom, and the effect of any redemption of the 8.0% notes after September 15, 2013.
- Potential impacts from tax examinations, medical-device taxes, and receivables exposure in financially stressed countries.